Financial Markets Today: Quick Take – February 3, 2023

What is our trading focus?

Equities: Mixed earnings from big tech halts the one-way move

Apple, Alphabet, and Amazon are reported worse than expected earnings and outlook falling in extended trading. Given the combined weak signals coming from these three giants it is a bit puzzling to see the S&P 500 futures only down 0.6% in early trading hours. This could of course change if the market chooses to look through these mixed earnings and focus on China’s upside surprise on January PMI figures released today. The key resistance level to watch today in S&P 500 futures is the 4,145 level and on the upside it is the 4,200 level.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) retreated

The Hang Seng Index dropped for the second day in a row, falling around 2% as of writing. HSBC (00005:xhkg) and Ping An Insurance (02318:xhkg) fell over 3%. Baidu (09888:xhkg) pulled back and pared some of its strong recent gains. Chinese developers declined while local Hong Kong developers gained following Hong Kong scrapped Covid-test requirements from mainland visitors. Week-long Southbound selling from mainland investors in Hong Kong stocks also weighed on sentiment. In A-shares, CSI300 slid about 1%. Consumer, real estate, EV, solar, non-ferrous metal, coal mining, and steel-making names were major laggards. Caixin China PMI Services came in at 52.9 in January, 4.9 points higher than the December reading, and beating the median forecast of 51.0. The output and new orders sub-indices were back into the expansion territory for the first time in five months.

FX: USD and JPY surge as other central banks’ tightening expectations get a haircut

The USD rebounded sharply just after its fresh, post-FOMC meeting lows as both the ECB and BoE surprised on the dovish side relative to expectations (more below), eroding a key fundamental driver of EURUSD upside. The USD strength was matched and even exceeded by JPY strength as the latter enjoys the tightening of yield spreads and as global energy prices continue to soften. Many USD charts have posted significant bearish pattern reversals, but pronounced USD strength may only follow through higher if risk sentiment takes a turn south as well. Strong US data today could be one ironic way to turn sentiment sour by throwing into doubt the ability of US treasury yields to continue settling lower now that the Fed is priced to cut rates from its impending peak policy rate by almost 200 basis points by the end of next year.

Crude oil (CLH3 & LCOJ3) lower on fading China optimism

Crude oil is heading for a +5% loss on the week as China optimism fades and US stockpiles continue to climb. Ahead of the Chinese LNY the market had been pricing in the prospect for a strong recovery in China, but that reopening trade is now being challenged amid questions over the timing and the extent to which the pickup will be strong enough to offset softness elsewhere. We believe that Chinese demand, additional sanctions against Russian fuel exports, together with OPEC+ price support through actively managing its production has created a soft floor under the market. In the short-term the market remains troubled by long liquidation from hedge funds forced to reduce recently established long positions. Focus on US payrolls and its impact on the dollar.

Gold (XAUUSD) sees sharp pull back ahead of US payrolls

Gold’s short-term technical outlook deteriorated on Thursday after the FOMC-led rally to a fresh cycle high, and near resistance at $1963, was replaced by a sharp reversal as the dollar strengthened, especially against the euro following a dovish rate hike from the ECB. The turnaround in the dollar highlights how gold continues to track broader USD trends. With gold heading for its first weekly loss in seven, the attention now turns to US payrolls and ISM Services data, with additional dollar strength before or after potentially sending gold below its 21-day moving average, currently at $1914, for the first time since early November. ETF holdings meanwhile shows no sign of demand with total holdings hovering near a three-year low.

 Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) fall further on “peak tightening” hopes

US  2-year yields touched cycle lows just above 4.0% after the ECB surprised dovish yesterday by suggesting it may pause in its hiking regime to assess the situation after an additional 50 basis point hike in March. UK short yields also plunged after the Bank of England suggested it is looking for reasons to pause after yesterday’s rate hike. Action in US 10-year yields was similar, with the benchmark yield edging toward the cycle low just above 3.30% before easing back higher. Today’s heavy mix of US data likely to weigh on whether yield can punch to new lows for the cycle since last September.

What is going on?

Earnings recap: Apple, Alphabet, and Amazon

All three US technology giants disappointed investors seeing their shares decline in extended trading halting the strong momentum in US equity futures. Apple missed quite considerably on revenue and EPS driven by weakness in its iPhone business which is being hurt from the inflationary pressures reducing discretionary spending among households. Apple did not provide any guidance but said on the conference call that it is seeing demand coming back in China and that iPhone revenue would have been up for the quarter if supply chains had worked normally. Alphabet’s Q4 earnings were a disappoint relative to investor expectations despite the company hitting analyst estimates on revenue and earnings. CEO Pichai said on the conference call that the company would soon release their competitor to ChatGPT and that its AI unit DeepMind would begin to be featured in its results. Amazon had a better-than-expected Q4 on revenue and operating income but the e-commerce's guidance on revenue and operating income were below analyst estimates, and its cloud business AWS, the previous engine of the overall Amazon business, is seeing a slowdown in demand.

Gold company ETFs see mounting inflows

Gold companies and ETFs are getting more popular among investors, as the gold price has gained 17% from its cycle low, with the outlook possibly set to improve further if central banks eventually ease interest rates. Historically gold has generally rallied strongly when the Fed pauses and cuts interest rates. The market is perhaps pre-empting the Fed’s expected turn to easing. Another factor contributing to the ‘gold rush’ is that many central banks have increased their gold holdings. While total holdings in bullion backed ETFs lingers near a three year low, positions in gold mining ETFs have grown considerably this year. The largest gold miner ETF fund VanEck Gold Miners ETF (GLD) has seen inflows rise 400%, suggesting retail investors are increasing their positions. Other popular gold ETFs so far this year include iShares Gold Producer UCITS ETF (IAUP) and iShares MSCI Global Metals and Mining Producers ETF (PICK) with inflows into those ETFs rising over 100% this year.

Bank of England hikes 50bps, but further rate hikes see a high bar

As expected, the Bank of England raised rates by 50bps to 4%, with a vote of 7-2 as two of the usual doves favoured keeping the rate unchanged. The Bank eased up on its forward guidance, saying that further policy tightening “would be required”, but only “if there were to be evidence of more persistent [inflationary] pressures” and preceding all of that language touting “considerable uncertainties” in the outlook. The previous language was more direct on the need to continue hiking. By setting pre-conditions for another rate hike the bank suggests it is looking for reason to pause its tightening cycle. This was a dovish surprise, prompting the market to punch UK 2-year yields some 25 bps lower and 10-year yields a massive 30 bps lower. Growth forecasts were revised up to –1% peak-to-trough versus –2.9% previously, with unemployment seen peaking at 5.3% versus 6.0% previously. The accompanying MPR saw a downgrade to the 2023 inflation forecast to 4.0% from 5.25% with inflation of just 1.5% next year.

Dovish ECB despite confirming another 50bps rate hike; German 10-year yields plunge 30bps

With very hawkish expectations set in, the ECB had a high bar to surprise hawkish, and it failed to do so. While the European Central Bank raised rates by 50 bps to 2.50% and committed to another 50 bps rate hike in March, the statement said that at the March meeting, the ECB will evaluate the subsequent path of its monetary policy. This sent out a message that the most hawkish G10 central bank currently may also be looking at stepping down its pace of rate hikes. Lagarde attempted to stress the longevity of reaching terminal by stating that when the level is reached, rates will need to stay there. However, there was a clear scaling back of hawkish market pricing for 2023 with around 25 bps of tightening taken out. Reuters sources later noted that ECB policymakers see at least two more rate hikes, with an increase of 25 bps or 50 bps in May, which may thrash hopes of a May pause for now. German 2-year yields ended the day 18 bps lower and the 10-year Bund yield slumped by 30bps, posting its biggest single daily decline since 2011.

Challenges for India’s Adani Group continue to mount

The market loss for the Adani Group mounted over $120bn, a 51% drop since the Hindenburg report was published, once again sending concerns of a possible contagion skyrocketing. Challenges for the group continue to mount since the Hindenburg report, with a shock withdrawal of share sales, some banks refusing to take Adani securities as collaterals and then the Reserve Bank of India asking Indian banks for details of the exposure to Adani Group. Furthermore, S&P Dow Jones Indices said that it will remove Adani Enterprises from its sustainability indices effective February 7, which would make shares less appealing to sustainability-focused mutual funds as well and cause foreign outflows. Contagion concerns are widening, but still limited to the banking sector. Focus remains on further risks of index exclusions, while a coherent response on the fraud allegations from the Adani Group is still awaited.

What are we watching next?

Today’s US jobs report and ISM Services the next big test for market narrative

Yesterday’s initial weekly jobless claims nudged lower again to 183k from 186k for the week ending 28 January, a surprise against the expected rise to 200k. This suggests that the US labour market is still very tight, as the focus shifts to the Jan. US nonfarm payrolls change release later today. Bloomberg consensus expects a modest cooling in the headline NFP gains to 189k from 223k in December, with expectations possibly a bit on the soft side after a weak January ADP private payrolls print earlier this week of +105k. The unemployment rate is also expected to come in a notch higher at 3.6% from 3.5% previously while wage gains are seen softening further to 4.3% YoY from 4.6% YoY previously. A larger-than-expected softness in labour market can further send dovish signals to the market that is still dealing with the post-Powell and ECB/BOE dovishness, while stronger than expected data, including the January ISM Services survey ninety minutes later, could confuse the market.

Earnings to watch

Today’s earning focus is Intesa Sanpaolo in Europe for glues into loan activity and loan provisions in Europe’s weakest link in credit markets. In the US equity our earnings focus today is on Regeneron Pharmaceuticals. Next week’s earnings will continue at a blistering pace but with most mega cap earnings out of the way we now move further down the hierarchy of companies and with slight tilt towards Europe.

• Today:  Coloplast, Sanofi, Intesa Sanpaolo, Denso, CaixaBank, Naturgy Energy, Assa Abloy, Regeneron Pharmaceuticals

Next week’s earnings:

• Monday: Activision Blizzard, IDEXX Laboratories
• Tuesday: Carlsberg, BNP Paribas, Siemens Energy, SoftBank Group, Nintendo, BP, Linde, Vertex Pharmaceuticals, KKR & Co, Fortinet, Centne, DuPont, Illumina, Enphase Energy,
• Wednesday: A.P. Moller – Maersk, Vestas Wind Systems, TotalEnergies, Societe Generale, Deutsche Boerse, Adyen, Equinor, Yara International, Walt Disney, CVS Health, Uber Technologies
• Thursday: KBC Group, Brookfield, Thomson Reuters, L’Oreal, Vinci, Credit Agricole, Siemens, Toyota Motor, NTT, Honda Motor, AstraZeneca, Unilever, British American Tobacco, ArcelorMittal, DNB Bank, Volvo Car, Zurich Insurance Group, Credit Suisse, AbbVie, PepsiCo, Philip Morris, PayPal, Cloudflare
• Friday: Enbridge, Constellation Software

Economic calendar highlights for today (times GMT)

0815-0900 – Eurozone Final Jan. Services PMI

 0930 – UK Jan. Final Services PMI

1000 – Eurozone Dec. PPI

1215 – UK Bank of England’s Huw Pill to speak

1330 – US Jan. Change in Nonfarm Payrolls

1330 – US Jan. Unemployment Rate

1330 – US Jan. Average Hourly Earnings

1445 – US Jan. Final S&P Global Services PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: